Other Voices: A practitioner’s scorecard to hedge fund replication

Andrew Beer This article was authored by Andrew Beer, founder of Beachhead Capital Management LLC in New York. Below is the first part; you can download the full version of the article here.

There is a great deal of confusion about how to measure the success of hedge fund replication – in a sense, to answer the question, "Has hedge fund replication worked?" In this note, we provide a candid assessment of the successes and failures of the space and introduce a framework of five criteria – a "scorecard" – as a guide for potential investors.

On the one hand, replication products overall have fulfilled the original promise of delivering "hedge fund returns" but with much lower all-in fees and daily liquidity. Specifically, over the past five plus years an array of replication products has delivered returns comparable to funds of hedge funds and, more importantly, outperformed managed account platforms, UCITS funds and investable hedge fund indices.

On the other hand, potential investors often are put off by the complexity and opacity of many such products – especially those offered by investment banks. We attribute this frustration to unrealistic expectations, set by the banks themselves, that the strategy should be as simple and predictable as "investing in the S&P 500 index" – that is, a default allocation that requires minimal due diligence with de mi......................